Ann Inc: What's Driving LOFT's In-Store & Online Revenues?

Through its LOFT brand, Ann offers a wide range of women’s casual separates, dresses, tops, weekend wear, footwear and accessories. As compared to Ann Taylor, LOFT offers more relaxed fashion, for both work and home, in the affordable “upper moderate” price category. Ann operates more than 500 LOFT stores in North America and this division accounts for over 50% of its value as per our estimates.

Driven by its appealing product range and growing online business, LOFT‘s stores and Internet revenue per square feet increased rapidly from $337 in 2009 to $411 in 2012. In 2013, the rate of increase slowed down a little due to imbalance in its product mix that impacted the brand’s sales in the first quarter of fiscal 2013. However, the company recovered quickly with its disciplined inventory control and strong sourcing system. Going forward, we expect LOFT‘s stores and Internet revenue per square feet to continue to rise and reach $540 by the end of our forecast period. Apart from its attractive offerings, a rise in online sales, the launch of global shipping, multichannel retailing, brand specific marketing and targeted expansion will help the cause.

Proper inventory control is an important aspect of a retailer’s business as it enables it to launch new products in accordance to the prevailing trends and season, and operate with fewer discounts. Ever since Ann faced inventory hangover issues in the latter part of 2011, it has been on top of its inventory management with its merchandise design and production strategy.

A significant portion of Ann’s products are developed in-house exclusively by its product development and design teams. The merchandising group determines the inventory needs for the upcoming season, passes on the requirements to the design team, and plans a merchandise flow system for different manufacturers. This strategy has enabled the retailer to develop appealing products with relevant fashions. Since Ann was prompt in identifying and developing a balanced merchandise mix for LOFT, the brand was able to recover quickly despite weakness in the U.S. apparel market.

In the latter half of 2012, Ann invested heavily in LOFT’s bright colors and kept the proportion of black and neutrals low, which led to product imbalance. This weighed heavily on the brand’s mainline stores comparable sales growth is Q4 fiscal 2012 and Q1 fiscal 2013. However, after a couple of weak quarters, LOFT’s performance improved as Ann worked aggressively on its product mix. The company reduced its focus on bright colors and invested more in white, black and neutral, as well as prints and patterns. This provided the brand with a much better product mix that complemented its strong offerings in denims, casual pants, shorts, tops, etc. Backed by its improved product mix, LOFT performed very well during the remaining three quarters of fiscal 2013. We expect the brand to continue its strong performance in the future, and this should drive its revenue per square feet.

Growing Online Business

With rising popularity of online shopping, increasing Internet penetration and proliferation of smartphones and tablets, the U.S. online apparel industry has grown at a robust pace over the past few years. Ann has been at the forefront of this growth with its strong online channel and enticing merchandise range. We believe that this trend will continue in the future as the forecast for online apparel industry is very optimistic. According to eMarketer, online apparel sales in the U.S. are expected to increase to $90 billion by 2016, up from $45 billion in 2012. Apart from the industry growth in the U.S., launch of global shipping will also help LOFT‘s online revenue growth. Last year, Ann started shipping its products to over 100 countries, where it received pleasing customer response. This provides a tremendous growth opportunity for LOFT’s e-commerce business and, subsequently, its revenue per square feet.

Additionally, Ann is leveraging its strong online channel to drive greater store traffic with its multichannel retailing. In 2012, the retailer introduced its multichannel initiative, wherein it combined its inventory pool across stores and digital channel to have a single view of inventory. The idea was to increase product variety over the Internet and improve delivery responsiveness. The results have been very good so far and the multichannel approach has enabled the company to effectively clear surplus inventory without much pressure on comparable sales or margins. This bodes well for the growth of LOFT‘s revenue per square feet.

Brand Specific Marketing And Targeted Expansion

Ann is undertaking separate and specific marketing campaigns for both its brands to make sure that it targets the right customer group. For LOFT, the retailer’s focus is more towards improving brand awareness in global markets and strengthening the connection with existing customers. The brand-specific marketing approach has drawn significant customer attention so far and is likely to help the company build a vast customer base going forward. Interestingly, LOFT’s client base registered double digit growth (year-over-year) in the fourth quarter of fiscal 2013, suggesting that its marketing campaigns are working well.

Since LOFT has a decent presence in the U.S., Ann is planning its expansion carefully to prevent self-cannibalization. Instead of expanding aggressively, the company is identifying relatively underpenetrated small and mid-markets to open new stores. By enhancing the brand’s reach in these markets, Ann will have access to a larger group of customers. In addition to the U.S., the retailer is expanding the brand in Mexico and Canada, where its products are likely to resonate well with the huge pool of fashion-conscious customers.

Significance Of The Metric

We currently forecast LOFT’s stores and Internet revenue per square feet to increase from $422 in 2013 to $542 over the next five-to-six years. However, if the brand’s international operations kick off and its domestic business continues to prosper, pushing the figure to $590 instead, there can be about 5% upside to our price estimate for Ann. On the contrary, if some missed fashion calls and merchandise imbalance issues restrict the figure to $500, there can be about 5% downside to our price estimate.

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